Be aware of all the potential downsides

When two of my sons came to me a few months ago to announce they had joined the Dixie State University cheer squad, well, let’s just say I raised an eyebrow or two.

“Let me get this straight,” I questioned, “You are spending long hours at the office learning the family business and preparing for your securities examinations, while also staying up late on nights and weekends doing homework as you work toward your bachelor’s degrees, and now you want to be cheerleaders in addition to all that?”

The boys then explained to me that on the squad they would be getting lots of exercise, have the opportunity to contribute to a great school, and would be spending 10-12 hours a week in practice, games and road trips with a whole bunch of beautiful girls. Then, with big smiles, they asked, “So, Dad, what’s the downside?”

I searched for a good comeback, but there was nothing I could say to that except, “Why wasn’t I so smart when I was a single college kid?”

An individual was recently describing for me a fairly exotic investment he was planning to make. He had done his homework and felt good about moving forward, despite the risks involved. He was excited about the reports he had received from other investors and felt like this was going to be a great investment for him. And so I asked him, “What is the downside?” Without hesitation, he responded, “I could lose my entire investment.” I was satisfied that he was not fooling himself. He understood that he was embarking on a path to obtain above market returns, and in exchange he knew he was taking a big risk.

When we really want something in life, it is human nature to focus more on the upside and minimize the downside risks. Last year, I attended a refresher flight training course in Las Vegas taught by one of the nation’s most respected flight instructors. The four-hour course was titled “Nine ways you can kill yourself in an airplane.” Talk about getting right to the point. The instructor pointed out that flying is fun and easy, when everything is going well, so good training should focus on what to do when things are not going so well.

The same is true in investing. When things are going well, everyone is an expert. When the markets are up, everyone begins to feel they can do no wrong. It is times like this when it is wise to take another look at each of your investments and ask, “What is the downside?” In every investment, there will always be potential downsides. Make sure you understand and are comfortable with them.

In all decisions in life, the key is to keep our eyes wide open and make sure the path we are on is compatible with our goals and personality because there is always a potential downside. Unless, of course, you are a single young man on the DSU cheer squad. I haven’t found the downside to that one yet.